Despite Brexit, London will remain the VC capital of Europe

The years living in the looming shadow of Brexit have, against the odds, been a golden period for UK tech. We've witnessed multiple-billion-dollar exits – including Zoopla’s and Farfetch’s – and VC funding at record highs, with about £2.6bn deployed in the UK in the first two quarters of 2018 alone. As and when the UK finally leaves the EU, that’s not going to change – even though Brexit will mean a shift in emphasis for the sector as a whole.

There are some reasons for optimism. A technology startup’s success always depends on three crucial ingredients: access to capital, access to talent and access to markets. Post-Brexit Britain will remain well positioned on all three. Leaving the EU, though, does change Britain’s comparative advantages, and will determine what kind of startups can thrive in the country's ecosystem.

London will remain the VC capital of Europe. According to KPMG, more than twice as much venture capital was deployed in the UK as in Germany in the third quarter of 2018. London remains the obvious location for international funds seeking a European HQ, as SoftBank’s presence in the UK testifies. Since the referendum, top Silicon Valley funds have led large investments in globally ambitious UK companies, from Sequoia’s $50m funding of Graphcore to Greylock’s investment in my own firm, Entrepreneur First. The British Business Bank – Britain’s state-owned bank tasked with providing credit for small and medium businesses – is flush with new cash, and has picked up much of the slack left by the European Investment Fund.

Access to talent will be a thornier matter. The ability for talented software engineers from across Europe to join and contribute to UK startups has been crucial in enabling the UK’s tech boom over the past few years. The end of freedom of movement for EU citizens is a major blow, and one the tech sector will not escape.

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Yet UK tech will likely still be able to attract talent, particularly at the highest skill levels. That is for two key reasons. First: the UK’s Tech Nation Visa Scheme is one of the most generous in the world for extraordinary individuals – and the number of available visas has doubled over the past two years. This is a real win that the sector needs to defend and, possibly, extend.

The second reason is Britain’s exceptionally strong universities. Times Higher Education ranks Oxford and Cambridge as the world's top two universities, with Imperial College London joining them in the top 10. These and other institutions will continue to provide the tech industry with world-class talent, particularly in areas such as AI. In turn, this means that disruption to higher-education institutions is the biggest hidden Brexit risk for startups: the sector must ally with universities to mitigate the worst hits to research funding and collaboration.

Another risk has less to do with immigration rules and more to do with the national mood music. Even if talented people can get into the country, does it sound like somewhere they’ll be welcome? The UK government has done little to send a much-needed warm message; startups and investors will have to be louder than ever.

Finally, markets. The UK is leaving the world’s largest single market, but this affects tech startups less than many other companies. Israel, the original “Startup Nation”, has demonstrated that to begin life in a small market forces entrepreneurs to think global from day one.

Joe Waldron

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Importantly, leaving the single market will have the least impact on the most ambitious startups. The EU’s regulatory harmony has always been somewhat offset for startups by its linguistic and cultural diversity. In any case, these companies place no geographic bounds on their aspirations. The UK’s prosaic but fundamental strengths – a favourable time zone and the English language – will keep the country attractive as a springboard to launch a global company.

What does this all mean for the UK’s comparative advantages? Post-Brexit Britain will be an excellent place for startups that need access to abundant, patient capital, world-leading talent in areas of cutting-edge research and large global customer bases. While many companies fit the bill, the model is particularly attractive for “deep tech” startups. These are companies working with new technologies, such as AI, virtual reality or synthetic biology. As the emerging success of UK companies such as Darktrace, Improbable and Tractable shows, the UK has strong foundations in this area. It’s on those foundations that the whole ecosystem – founders and VCs, of course, but also the government and universities – will need to build on for UK tech to continue to prosper.

The period since the referendum has been one of great uncertainty – and that’s likely to continue for many years. Whatever the eventual political settlement, if the UK plays to its strengths, it will be able to not only save its technology ecosystem, but also take decisive steps to becoming the world’s Deep Tech Nation

Matt Clifford is the chief executive and co-founder of Entrepreneur First